HR INFO | Can employers lawfully demote employees?

As an alternative to dismissal, an employer may consider other types of action, such as demotion. 

Demotion generally involves a reduction of rank or seniority and in some cases, this can also mean a decrease in pay.

But if you are thinking of demoting an employee, there are some risks you need to seriously think about to avoid claims of unfair dismissal, breach of contract and discrimination.

The Contract of Employment allows demotion

Can employees be demoted for no reason? Not exactly. In order to demote an employee, you should expressly reserve the right to do so in the Contract of Employment.

The contractual provision should lay down the circumstances that it will be used, for example, as an alternative to dismissal when dealing with poor performance or misconduct. On this basis, you should only demote an employee in accordance with the circumstances set out. When you taking the decision to demote, make sure that it’s not for any discriminatory reason otherwise you may face claims for unlawful discrimination.

It is very important that you follow a fair procedure. If you are demoting the employee for misconduct, you need to investigate the matter to ascertain the facts, tell the employees of the problem and give them the chance to put their case in response before taking action. If you are demoting the employee for capability reasons, you need to give them fair warning and provide them with the opportunity to improve their performance issues.

If you do demote someone without reasonable and proper cause, it will be considered a breach of the implied duty of mutual trust and confidence and pave the way to the employee resigning in response to the breach and claiming constructive dismissal.

Even if you do have an express provision in the contract allowing demotion, you should consult with the employee to make sure they agree with the demotion to avoid future complaints.

The Contract of Employment is silent on demotion

If there is no provision in the contract allowing demotion, you must seek agreement from the employee. You should consult with them, explaining the reasons and stressing that this is an alternative to dismissal. If they do consent, make sure you get their agreement in writing.

If they don’t agree after lengthy consultation, you may need to think about serving the employee notice that you will terminate the existing contract and offer a new contract with the new employment terms and conditions. Always seek legal advice before dismissing and re-engaging employees.

Remember that in cases of dismissal for acts of gross misconduct, however, the employer may still elect to dismiss the employee without notice if they don’t agree to the demotion (and you will not be offering re-engagement).

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Settlement agreements

Employers may need to think about using a settlement agreement to protect themselves from any claims for breach of contract, unfair dismissal or discrimination.

A settlement agreement is a legally binding document between an employer and employee which settles any claims that arise from the employment relationship or the termination of employment.

In the agreement, an employee waives their rights to bring legal claims against their employer in return for a discretionary severance payment. Most legal claims regarding statutory and contractual rights can be waived as part of the agreed terms in a settlement agreement, including unfair dismissal and discrimination.

If you and the employee do not reach an agreement, there are some circumstances where the negotiation discussions cannot be used as evidence in legal proceedings by either party to support their cases. Seek legal advice at the earliest opportunity because without such confidentiality in place, you are leaving yourself very vulnerable to future litigation.

Comment

Carrying out a demotion is a difficult area. It can also have a wider effect than just to the affected employee, for example, it can have a negative impact on team morale. This is why when you are in the process of considering demotion, you should always think about other sanctions that could be considered more effective in the circumstances. Any mishaps could mean you could face legal liability, so always seek advice from an Employment Law expert to minimise the risks for your organisation.

Director of Legal Services

James Tamm

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